The equitable doctrine of marshalling applies where there are two secured creditors of the same debtor who are each owed a different debt. Where one creditor is satisfied, the unsatisfied creditor can step into the shoes of the satisfied creditor if the security that the unsatisfied creditor held has been exhausted in satisfying the first creditor.
In Szepietowski v Serious Organised Crime Agency, the Agency entered into a settlement agreement with the debtor in relation to the recovery of property under the Proceeds of Crime Act 2002. The debtor owned five properties, including the family home. A bank had first charges on four of the properties and a second charge on the family home. Under the settlement agreement, all but the family home were transferred to the trustee for recovery. The Agency had second charges over two of the four transferred properties. Due to the downturn in the property market, it took longer to sell the properties than expected. The bank was repaid in full but the Agency only received a small sum from its security.
The Agency sought to invoke the equitable doctrine of marshalling and step into the shoes of the bank as second chargee of the family home. The debtor objected on the basis that the Agency had earlier agreed to release the family home from the claim and the settlement agreement. It would therefore be unjust to allow the Agency to take the benefit of another creditor's security over the family home.
The Court of Appeal disagreed. The settlement agreement did not exclude the court's ability to marshal security between creditors. It did not limit the Agency's rights of recovery to what it could recover from the sale of the properties over which it had charges. The fall in the property market had not been foreseen or provided for in the settlement agreement and the Agency could exercise all its lawful rights as a secured creditor, including marshalling the security. There had been no contractual exclusion of this right and no assurance or representation made to the debtor in relation to the family home upon which she relied to her detriment.
Things to consider
Unless the possibility has been specifically excluded, a secured creditor should consider marshalling of debts where another secured creditor with more than one security realises a security so placing the first secured creditor at a disadvantage.